Over the course of 2017, cryptocurrency trading went from being a fringe concept to the financial mainstream. People from around the globe have warmed to the notion of exclusively digital forms of money, as have active traders. The result has been the birth of a brand new asset class.
How Are Cryptocurrencies Traded?
In much the same fashion as traditional equity, commodity, and debt instruments, cryptocurrency trading can be accomplished in a variety of ways. It doesn’t matter where a trader is geographically located (aside from a few areas of strict prohibition). Computing power and an online portal is all that is required.
Here are the most common methods of engaging the cryptocurrency marketplace:
- Cash markets: Cryptocurrency exchanges, such as Coinbase or Gemini, offer individuals the ability to directly purchase or sell actual cryptocurrencies. Acquisitions may be stored in an exchange account, e-wallet, or offline.
- Contract for difference (CFD): Cryptocurrency CFDs are derivative products based upon the pricing of an underlying virtual currency. Leverage is applied, and they are bought or sold in an over-the-counter (OTC) capacity, similar to forex currency pairs. The trade of cryptocurrency CFDs is not permitted in the U.S.
- Futures: Standardized futures contracts based upon Bitcoin (BTC) are offered by the Chicago Mercantile Exchange (CME) and the Chicago Futures Exchange (CFE). Industry buzz anticipates a coming launch of more futures products based upon cryptocurrencies.
- Equities: Individuals may purchase stocks or trusts associated with the cryptocurrency environment on various international equities exchanges.
Keep in mind that these markets are still very much in their infancy. Constant volatility and huge swings in pricing are day-to-day occurrences. For instance, Bitcoin (BTC) consistently posts 30-day volatility measures eclipsing 7% of aggregate value.
Massive gains and losses are common, with rumors and news headlines often driving the action. With no central banking authority or formal regulatory body to stabilize asset pricing, the online cryptocurrency space is the “wild west” of active trading and investing.
Risks of the Cash Market
Most cryptocurrency trading is conducted in an OTC capacity on the cash markets. In a similar fashion to online commodities trading, individuals are able to enter and exit positions fluidly in the digital marketplace. Products such as Bitcoin (BTC), Ethereum (ETH), or Litecoin (LTC) are readily available to anyone with an exchange account.
No matter what market is being traded, there’s always an element of risk present. However, when it comes to the fledgling cryptocurrency exchanges, be aware of these unique concerns:
- Technical issues: In times of heavy systemic stress, which are not uncommon, instances of exchange “freezes” have been documented. During a freeze, traders are not able to enter or exit the market because capital and assets are not accessible. In addition, many high-profile hacking incidents targeting cryptocurrency exchanges have resulted in a loss of assets valued in the hundreds of millions of dollars.
- Fraud: In contrast to standardized futures exchanges, there’s no regulatory body overseeing the cash markets of any virtual currency. The decentralized nature of cryptocurrencies in general make market oversight and penalty enforcement extremely challenging.
- Forthcoming regulation: Pending regulatory efforts from governments around the globe may greatly impact how cryptocurrency assets are converted into physical cash. Tax guidelines, legality questions, asset classifications, and even market access are subject to change on short notice.
- 24/7 market hours: Cryptocurrency exchanges are open 24 hours a day, 7 days a week. Extreme volatility may occur at any time, day or night. In the event that a significant move negatively influences an open position, unavoidable and catastrophic losses are possible.
Even though these risks are very real, traders and investors continue to drive huge volumes in the cryptocurrency markets. For top assets such as Bitcoin (BTC) or Ethereum (ETH), daily traded volumes are typically measured in the billions of dollars. The promise of extraordinary rewards is attractive bait for risk-loving traders.
Getting Started with Cryptocurrency Trading
The meteoric rise in the value of BTC has brought the entire cryptocurrency marketplace to the doorstep of traditional finance. For the year of 2017, BTC traded from less than $1000 to an all-time high near $20,000. Driven by public interest and the astounding gains in value, the CME and CFE now offer BTC futures contracts.
If you are interested in BTC futures, or simply want more information regarding the budding cryptocurrency environment, check out the brokerage services suite at Daniels Trading. An experienced industry professional stands at the ready to shed some light on the arena of virtual currency.